According to reports, Cupertino is likely taking advantage of historically dirt-cheap interest rates on corporate debt by raising about $17 billion from a series of six types of bond papers.

It's not the largest non-bank bond sale in history, but it does rank near the top. Automaker General Motors raised $17.5 billion in bond financing a decade ago, for example. Then again, GM's financing arm, then known as GMAC, sort of made a bank out of the car builder. Pharma giants Abbott Laboratories and Roche Holdings also issued $14.7 billion and $16 billion in bond debt fairly recently. Record-level or not, Apple's sale certainly ranks right up there with the big boys.

Why Apple needs more cash now

You might wonder why one of the world's richest companies is raising debt right now. There's no single factor forcing Apple's hand here, but there is a perfect storm of ingredients that add up to a hunger for new debt.

First, interest levels are vanishingly low at the moment. Bond interest rates are typically attached to the rates of US Treasury Notes, and every flavor of these important papers are trading near 10-year lows. In short, it's rarely this cheap and easy to get your hands on fresh loans.

Second, Apple just announced that it plans to return $100 billion directly to shareholders over the next three years. That's more than double the previous plan, which called for $45 billion in dividend payments and share buybacks by the end of 2015. Even Scrooge McDuck would have a hard time finding that much spare change in his couch pillows, which explains why Apple is resorting to some financial engineering to fund the expanded plan.

Which brings us directly to the third point: Much of Apple's $145 billion in cash and investments come from sales outside the US and it's locked down in bank accounts on foreign shores. Simply closing those bulging Swiss, Irish, and Cayman bank accounts would make Apple's cash subject to so-called repatriation taxes. As much as one-third of that cache would go to Uncle Sam. The company only has about $45 billion in dollar-denominated All-American cash on hand to power that generous dividend and buyback program.

Better, then, to pick up cheap debt that's backed by the international cash reserves and use that as fuel for the shareholder-friendly programs. Let the foreign reserves percolate until the government tries another repatriation tax holiday, like the Homeland Investment Act of 2004. Or perhaps until Apple finds a use for its foreign cash, like a large acquisition.

Lastly, Apple is no longer the high-growth wunderkind of Wall Street that it used to be. Like Microsoft did 10 years ago, Cupertino has started catering to value and dividend investors. That demographic loves companies that hand out cash to shareholders, and debt is a perfectly acceptable source of financing for such policies. Look at the big banks as an example. Bank of America manages a $610 billion cash reserve but also sits on $618 billion in debt. That's just how these guys roll, making a mint on the spread between the returns on their own investments and the interest they offer to customers. Apple follows a proven path here.

$145 billion in the bank and still no perfect credit rating

So Apple's bond sale comes from the confluence of several key events. The company isn't even alone in exploring low-interest bond sales right now. Microsoft posted a $1.9 billion sale last week. Redmond's bonds garnered top-notch AAA credit ratings from both Moody's and Standard & Poor's, just edging out Apple's AA+ S&P grade and Aa1 from Moody's.

Triple-A businesses outside the banking world include Microsoft, Exxon Mobil, Automatic Data Processing, and Johnson & Johnson. All of these are proven cash machines just like Apple, but the devil is in the details. Moody's pinned Apple's imperfect rating on working in "a highly volatile industry" and needing to raise as much as $50 billion in debt over the next five or six years. "Just based on that, it didn't smell like a triple-A," a Moody's analyst told Bloomberg.

The third major credit ratings agency, Fitch, went further and suggested that Apple could be at risk of a spectacular implosion similar to those of Sony, Nokia, and Motorola Mobility. "Each has historically had a dominant market position and strong financial metrics, only to falter over a relatively short period of time," Fitch analysts wrote in a recent Apple report. Cupertino simply doesn't have the long-term contracts that a true top-notch credit rating requires.

What's next?

The next few years will be critical to Apple's long-term health. The company is making the transition from high growth to stable income—and change is never easy.

Tim Cook and company may set their sights too high and make promises they can't keep. Cutting down an announced buyback-and-dividend plan is hazardous to your share price, and diving too deeply into debt can damage your financial health. So Apple would be smart to set the bar low.

Shoot too low, and you'll look like you don't believe in your own future. That's another surefire way to scare away investors, not to mention trend-sensitive consumers.

It's a tricky balancing act. We're sure that Apple will be around ten years from now, but the coming two or three years will map out the path to a healthy, mature business—or a company on the ropes.

103 Reader Comments

They're borrowing because it's stupidly cheap to borrow right now because the fed's low rates means they don't need to pay many more fractions of a percent to get cheap cash from institutional investors (and probably Japan). That's it.

Yeah, lets not talk about the fact that Apple is using the American tax payer to help other rich people get even more rich. I know they are not unique in this but I feel that we should call them out for this dirty accounting trick whenever we see it.

Borrowing money to invest in your company is one thing. Borrowing money to pay dividends is another. Apple believes paying taxes is for losers

Everyone whining about Apple -- hate the game not the player. Don't like it, how about stop voting for your incumbent congressman/woman which the vast majority of voters in the USA do despite everyone hating congress.

Cost for dividend per share per year: $12.40Cost to buy back share: $430Cost to pay for interest on buying back share at 3%: $12.90Interest tax deduction for interest: roughly 25% of 12.90, or $3.22Cost to pay for interest on buying back share at 3% net of taxes: $9.68

In other words, Apple is making a profit buying shares back.

(all numbers off the top of my head, I hope I remembered them correctly, please gently correct me if I made a mistake)

To all the tax comments, taxes are probably a bigger components of Apple's earnings than the Mac line. Tax planning is breathing for a large company. Shareholders would be mad if a whole division tanked. Shareholders should be equally mad if a major company engages in no tax planning.

How did you write this article without talking about debt tax shields?

My thought upon reading the article as well. Shifting your capital structure to a portion of debt, so long as you don't exceed agent costs and the like (little chance of that for Apple), allows you to take advantage of the fact that debt is tax deductible. Leaving that out of this article seems like a pretty massive lapse.

They can actually GROW the company's value by taking on debt here (within the limits of the Modigliani–Miller theorem).

Analysts had initially suspected that the overwhelming interest would allow Apple to price the deal even inside last week's bond from Microsoft.

But some investors said Apple was leaving some spread on the table so that the deal would eventually trade tighter than the Microsoft issue - and so that Apple could get even better pricing next time round.

"If they are going to come back with another deal, be it in dollars or another currency, they will need to satisfy a similar investor type, so you want to leave a good taste in everyone's mouths," said Matt Duch, senior portfolio manager at Calvert Investments.

Yeah, lets not talk about the fact that Apple is using the American tax payer to help other rich people get even more rich. I know they are not unique in this but I feel that we should call them out for this dirty accounting trick whenever we see it.

...how are they using the tax payer?Are people being forced to buy Apple bonds?

Yeah, lets not talk about the fact that Apple is using the American tax payer to help other rich people get even more rich. I know they are not unique in this but I feel that we should call them out for this dirty accounting trick whenever we see it.

...how are they using the tax payer?Are people being forced to buy Apple bonds?

Maybe he's confusing taking out a loan, with government bail-out. Either that or it has to do with dodging taxes by using off shore banking.

It is disappointing that American corporations and the executives that manage them do not believe in paying taxes anymore.

Very sad day - that Apple is taking on debt to please their investors.

On a slightly unrelated note :It also bothers me that we have been hearing about Apple giving large stock bonuses to their executives over the last few years - Are employees getting a share of the bonuses for all their hard work over the last few years?? Or is all the bonuses going to executives only....

Nothing to see here, really. A publicly traded company doing what publicly traded companies do: Attempt to maximize return for investors while at the same time conserving cash on hand and minimizing tax liabilities.

I mean, I can understand that people would be a little disappointed to see Apple beginning to earnestly play the same shell games as so many other monolithic American corporations. This was inevitable though, and as best I understand is generally regarded as "smart business" due to the benefits offered to shareholders.

Borrowing money to invest in your company is one thing. Borrowing money to pay dividends is another. Apple believes paying taxes is for losers

Everyone whining about Apple -- hate the game not the player. Don't like it, how about stop voting for your incumbent congressman/woman which the vast majority of voters in the USA do despite everyone hating congress.

but then you might have to vote for the wrong party! we all know party loyalty is more important.

Borrowing money to invest in your company is one thing. Borrowing money to pay dividends is another. Apple believes paying taxes is for losers

Everyone whining about Apple -- hate the game not the player. Don't like it, how about stop voting for your incumbent congressman/woman which the vast majority of voters in the USA do despite everyone hating congress.

I chose to hate both the player and the game-- just because lots of people do something doesn't mean it's suddenly OK because it's reached some critical mass of dickishness.

Seriously, blame the government. They wrote the tax laws and guarantee the IRS knows better than anyone else how much they could be making.

Blame the nation-state system. The US government is not at fault because it's not even _possible_ for them to tax a foreign entity. The government can't stop Apple from having untouchable (by US government) subsidiaries any more than they can stop me from buying 60% of Toyota if I were rich enough.

Just one more reason why the corporate income tax should be abolished. Large corporations can easily take advantage of this international tax arbitrage, while small US companies that can't feel the full brunt of the corporate income tax.

I find it extremely irritating that people here seem to be demanding Apple close their foreign accounts and bring their money home. Whatever their reasoning, they are perfectly within the bounds of US law which allows citizens and corporations to have bank accounts overseas. It's a real stretch to say this is some how a loophole the rich bribed the government to create; why shouldn't US citizens and businesses be allowed to freely associate their money?

Apple is taking on debt because it's cheaper to take out a loan than move its cash around to pay off investors in a hope that its stock will stop plummeting. Apple knows it has the cash to pay off most of the debt if it needs to, but I'm sure it's hoping to earn enough that it won't have to dip into its cash surplus.

If there is one thing the corporate world has taught me, its this: Greed is OMFG good!

Even though you may be making billions and billions and billions of dollars in profit, even though you are one of the richest companies in the world, all that excessive wealth and empire building is just not enough. Every dirty trick in the book needs to be employed to make even MOAR MONEYS, even when you have too much to know what to do with.

Apple is going to spend $100B by the end of 2015 on dividends and buybacks. How much of their $145B will they spend on this? Apple earned about $40B in the past year. So, between now and the end of 2015 Apple will earn 2.5*$40B=$100B. So, the answer to the question is $0.

Apple didn't decide how to spend its cash. It decided not to accumulate more, and if it decides that $145B isn't enough, it can always slow down its repurchases.

Borrowing money to invest in your company is one thing. Borrowing money to pay dividends is another. Apple believes paying taxes is for losers

Everyone whining about Apple -- hate the game not the player. Don't like it, how about stop voting for your incumbent congressman/woman which the vast majority of voters in the USA do despite everyone hating congress.

I chose to hate both the player and the game-- just because lots of people do something doesn't mean it's suddenly OK because it's reached some critical mass of dickishness.

Do you chose to pay more taxes than you are legally required to? No, and neither does Apple. So you are in the exact same moral category as Apple and your sense of self-righteous isn't justified at all. If you want Apple (or yourself) to pay more taxes, it is up to you to vote for the appropriate politicians to make it happen because absolutely nobody, not even Mother Theresa, will volunteer to pay extra taxes.

I find it extremely irritating that people here seem to be demanding Apple close their foreign accounts and bring their money home. Whatever their reasoning, they are perfectly within the bounds of US law which allows citizens and corporations to have bank accounts overseas. It's a real stretch to say this is some how a loophole the rich bribed the government to create; why shouldn't US citizens and businesses be allowed to freely associate their money?

Yes, you're right. The difference is corporations are given certain tax benefits that a private citizen does *NOT* have. Hence, the reason why they don't want to move that money back because it would trigger a tax bill they don't want to pay. Even though, they could easily pay it. Everyone seems to bring up that fact they have some enormous gob of cash they're hording. You know what else hordes? Squirrels. And I hate squirrels.

Trying to please stockholders is like giving a mouse a cookie. You know the rest. They should focus on improving their ecosystem instead.

I really hope they're gearing up for something like buying a controlling stake in Disney to simply force content licensing deals for a hypothetical iTV. But sadly, that would have been a Steve Jobs move.

also private citizens have no chance to bribe/buy politicos to look the other way even when they do get caught for illegal acts.begining of the end for crapple, now just another dodgy yank finance house with all the ethical problems that brings for a firms reputation/goodwill.as i have said before, ten years time, crapple will be butt end also ran, run by banksters for other 10%ers, its massive dodgy cash pile wont last very long once its price realy starts to plummet and folk realy give up any interest in any new product.tech history is made up of firms that used to be big names and are already forgotten.could'nt happen to a more deserving bunch...

Borrowing money to invest in your company is one thing. Borrowing money to pay dividends is another. Apple believes paying taxes is for losers

Everyone whining about Apple -- hate the game not the player. Don't like it, how about stop voting for your incumbent congressman/woman which the vast majority of voters in the USA do despite everyone hating congress.

or at least just stop blindly believing crap and stop buying product...its called a boycott, can be any level from single individuals, through groups upto nations and world groups like un, itc eu etc etc, i hate apples way of business as well as their crud products so i made a personal decision to boycott them, and to do all i can to convince others not to buy.have also never bought into isungs dodgy business methods or its products, i dont care if galaxy phone is the greatest thing since oxygen, i still wont buy any...its called personal morals and ethics, dont just blame it on so called democracy at work, thats the easy, greedy, lazy persons answer/exscuse....

Borrowing money to invest in your company is one thing. Borrowing money to pay dividends is another. Apple believes paying taxes is for losers

Everyone whining about Apple -- hate the game not the player. Don't like it, how about stop voting for your incumbent congressman/woman which the vast majority of voters in the USA do despite everyone hating congress.

I chose to hate both the player and the game-- just because lots of people do something doesn't mean it's suddenly OK because it's reached some critical mass of dickishness.

Do you chose to pay more taxes than you are legally required to? No, and neither does Apple. So you are in the exact same moral category as Apple and your sense of self-righteous isn't justified at all. If you want Apple (or yourself) to pay more taxes, it is up to you to vote for the appropriate politicians to make it happen because absolutely nobody, not even Mother Theresa, will volunteer to pay extra taxes.

He/she probably does pay more tax than strictly necessary actually - how much effort and creative accounting do you think people really put into their tax returns? It's not worthwhile for individuals unless your income is ridiculous and you can afford it to be challenged even if what you did was technically legal (you probably can't). Apple (and pretty much every other large multinational company) are doing a *lot* more than just not voluntarily paying extra tax here - it's not even remotely the same moral category.

Yes it's up to governments to fix the system, but that doesn't excuse said companies - particularly when they're probably lobbying to avoid that happening.